I am currently working on pricing bonds and intend to utilize the S490 curve sourced from Bloomberg. This curve is constructed exclusively using swap rates. However, I have encountered challenges when incorporating the I-Spread and performing bond pricing calculations using this curve. As a result, I would like to ascertain whether I have selected the correct curve for my purposes or if an alternative curve is more suitable.
Initially, I attempted to incorporate the I-Spread using a parallel shift across the entire yield curve. However, after recalculating the zero coupon curve based on the market rate plus the I-Spread, I discovered that it produces incorrect bond prices. This discrepancy has prompted me to question the efficacy of a parallel shift approach with a constant spread applied uniformly across the yield curve.
To elaborate further, I am interested in obtaining insights on the following aspects:
- The compatibility of the S490 curve, constructed solely using swap rates, for accurate bond pricing calculations.
- Any potential limitations or considerations when incorporating the I-Spread with the S490 curve.
- If the S490 curve is not appropriate for bond pricing, guidance on selecting an alternative curve that aligns better with the bond valuation requirements.
I would greatly appreciate any advice, suggestions, or references to relevant resources that can assist me in understanding the compatibility of the S490 curve for bond pricing calculations. Additionally, if an alternative curve is recommended, I would appreciate guidance on selecting the most suitable curve and any necessary adjustments to incorporate the I-Spread accurately.
Thank you for your assistance in resolving these queries and providing clarity on the appropriate curve selection for bond pricing.
Note : From what I know, The I-spread of a bond is the difference between its yield to maturity and the linearly interpolated yield for the same maturity on an appropriate reference yield curve.